In Pursuit of Affluence

There was a time in retail real estate when “redevelopment” meant nothing more than slapping on a fresh coat of paint, popping some new skylights into a property and sprucing up the food court, says Billy Lawrence, partner with the San Antonio, Tex.-based architecture firm Alamo Architects.

An owner might re-think their tenant mix. But mostly that was about shuffling in-line tenants and occasionally swapping one department store chain for another.

Now, says Dan Sullivan, senior vice president of development with GK Development, Inc., a Barrington, Ill.-based real estate acquisition and development firm, the rules have changed.

The reason: Regional malls are losing shoppers to lifestyle centers and developers are rushing to fill that need. Today, a full 65 percent of new retail development in the United States consists of lifestyle centers, according to research from Morgan Stanley. Chances are, you know of — or are constructing yourself — lifestyle centers near your properties right now.

So redevelopment has taken on a whole new meaning. Now, Sullivan says, transforming tired properties can mean going upscale to retain shoppers being drawn to the ever-growing crop of lifestyle centers. That means investing in aesthetics, landscaping, wooing retail tenants that aren't normally associated with regional malls and increasing the number of restaurants and entertainment options at the property.

“Malls right now are in a change mode — they want to continue to be the dominant property type in their segment,” says Greg Maloney, president and CEO of Jones Lang LaSalle Retail, a property manager with 36 million square feet of retail space in its portfolio. “A lot of it has to do with turning the mall inside out and making it more attractive from the outside.”

If you can't beat them, join them

An increasingly popular maneuver in redeveloping properties is to take a large empty lot or a vacant building — often a former department store space — and convert it into a lifestyle center addition at a regional mall.

If a developer can find a lifestyle tenant large enough — Barnes & Noble or Bass Pro Shops, for example — to take a 100,000-square-foot floor plate, the move can be accomplished without major structural changes, according to Darrell Pattison, director of design and chief strategic officer with ka architecture, a Cleveland, Oh.-based architecture and planning firm.

But that's not always the case.

Much of the time, owners are taking on tear-down jobs, razing empty anchors or entire wings of properties and transforming them into open-air streetscapes, lined with smaller in-line retailers and restaurants. The price on such projects ranges from $10 million to $70 million, depending on the extent of the work, according to John Larsen, principal and national director of retail centers with Carter & Burgess, Inc., a national consulting firm. To minimize the impact on the existing tenants and shoppers, the work is usually done at night, after the mall closes.

“Part of it is clearly an attempt to make a hybrid by introducing lifestyle tenants to the mall to take away the opportunity from the lifestyle center,” says Pattison, who notes that owners are now more willing to buy out weak department stores in order to do so. “There is a lot of competitiveness right now about who's going to get this restaurant or that bookstore.”

GK Development is in the midst of doing so at North Grand Mall, in Ames, Ia. The company acquired North Grand in 2004, as part of a $120 million portfolio. The 340,000-square-foot mall, which Sullivan estimates was constructed in 1978, will use an adjacent strip center to create a 150,000-square-foot lifestyle component as part of its $30 million repositioning effort. GK also plans to replace North Grand Mall's existing façade, which Sullivan described as “drab and dated.”

The addition, called the Streets of North Grand, will bring in some completely new tenants to Ames, where the average household income is $82,562 a year. Incomes in the area are driven by state and federal institutions, including Iowa State University of Science & Technology, the U.S. Department of Agriculture and the Iowa Department of Transportation.

GK officials estimate that the Streets of North Grand will be the first lifestyle complex in Ames — previously, the closest lifestyle property in the region was the 2-million-square-foot Jordan Creek Town Center in West Des Moines, which combines a super-regional shopping mall with a lifestyle component that includes Bed Bath & Beyond, Best Buy, Old Navy and PETCO.

Vacant department store buildings can also create opportunities for malls to add on new entertainment components. In 2003 JCPenney decided to leave its 230,000-square-foot space at the 2.2-million-square-foot Tysons Corner Center in McLean, Va., for example, owner Macerich Company rearranged the three-level existing building with smaller retailers, including Arhaus Furniture, Banana Republic Petites and Hollister, and a 10-unit food court, while asking the international architecture firm RTKL to create an adjacent space to house a 16-screen AMC movie theater.

“We carved the wall through the department store box and built the new building through that,” says Jeff Gunning, vice president of retail practice with RTKL. “It now forms an enclosed entertainment destination at the end of the mall.”

RTKL completed the renovation, which affected more than 350,000 square feet of space at the property, in about two years.

But these kinds of aesthetic changes are not limited to new additions. Architects are advising owners to make mall entrances more welcoming. They want to cut against the “fortress” feel that consumers are said to dislike. Many are outfacing retail tenants around the entranceway, to give customers a sense of what they will find inside, says Irby Hightower, partner with Alamo Architects.

Other malls are installing large glass windows around their main doors to create more transparency and open up the center. For example, General Growth Properties installed two-story, floor-to-ceiling windows near the newly expanded entrance to the 758,000-square-foot Water Tower Place in Chicago when renovating the property. General Growth added the mall to its portfolio in 2004 as part of its acquisition of the Rouse Co. and has been trying to reposition it to take advantage of Water Tower Place's prime location on the Magnificent Mile and the area's average household income of $70,211 a year. The company plans to complete its program this year.

The renovation of Water Tower Place also included frosted glass chandeliers in each of its courts, a two-level granite water sculpture with dancing water jets and the introduction of new tenants, among them Lacoste, C.O. Bigelow and American Girl Place.

It's what's inside that counts

In many cases, current renovations are designed to up-scale retail properties. That starts with aesthetics. But owners are also adding expensive new retailers, luxurious seating and white-gloved customer services as an integral part of repositioning a mall to make it appeal to more sophisticated customers.

Bringing in a Nordstrom, a Neiman Marcus or a Saks Fifth Avenue usually ranks at the top of the department store wish list. Neiman Marcus's design consciousness, especially, can be an advantage for a regional mall transitioning to an upscale property, according to Billy Lawrence.

“They are one of our clients and they are very engaged and very sophisticated — they think of every one of their stores as unique and are interested in fitting in with their environment,” he says.

The Dallas-headquartered retailer's new store at the Natick Mall in Natick, Mass. is styled after an avant-garde art museum and looks nothing like a traditional upscale department store. When completed, the structure will feature gold-colored stainless steel panels that will wrap around the building's circular exterior.

However, Wally Brewster, senior vice president of marketing communications with General Growth Properties, developer and owner of the 1.2-million-square-foot Natick Mall, adds that smaller tony retailers, including Coach, Tiffany's and Apple, are integral to creating upscale allure as well.

“Going upscale is really about the environment that's created, the services that are provided and the ease of doing business inside the mall,” says Brewster. “We always want to continue to upgrade the exterior, but the content is what's really important.”

Among the add-ons that make wealthier customers happy are valet parking, concierge desks and easy-to-navigate directories that employ touch screens. Malls at the very high end of the scale might also hire personal shoppers. In addition, two features that contribute to a mall's popularity include restaurants and security. It behooves owners to bring in a few casual dining establishments, in the genre of PF Chang's China Bistro and Morton's Steakhouse, and to make sure security is visible.

“The more affluent customers want to be pampered a little more, so you make sure they have that,” says Maloney.

Pattison notes that to make discriminating shoppers more comfortable, owners are investing in soft seating furniture, expensive finishes and even opulent chandeliers.

“The look is sophisticated,” says Pattison. He likens an upscale malls' interior to that of a resort hotel or a museum, where the exclusive setting serves as an elegant backdrop for the shoppers.

Depending upon the extent, such a renovation can range from $6 million to $18 million, Pattison estimates. For example, replacing an old floor can be one of the more expensive items; especially, if the owner invests in large format porcelain tiles, stained concrete or terrazzo instead of marble.

Over the past several years, there has been some debate about the viability of the aging inventory of enclosed regional malls versus the advantages of the highly touted mixed-use and lifestyle centers. While the latter properties offer a cozy, town square setting and a large selection of food and entertainment, industry observers says there is sufficient demand for both open-air shopping centers and enclosed malls.

“I think there is a place for both malls and lifestyle centers on a long-term basis,” says Sullivan, who notes that inclement weather poses one of the biggest challenges to lifestyle centers. Customers are reluctant to frequent them during the winter and retailers are often biased towards enclosed mall's steadier stream of traffic.